Business owners can take a tax deduction for the business use of their personal car. Follow the twists and turns of the car tax deduction with these five steps.
If you’re a business owner who hops in your personal car to meet clients or pick up supplies, you should be taking a tax write-off for the business use of your car.
Can you deduct taxes for the business use of your car?
The self-employed can score a business tax deduction for using their personal car for business. Tax deductions reduce your taxable income, lowering your tax bill.
The car tax deduction comes in proportion to the business use of your car. While you can and definitely should deduct a trip to visit a client site, the IRS is not handing out deductions for business owners driving their children to softball practice.
The deduction amount hinges on the vehicle type, purchase price, and its use in the business. There are two methods to calculate the car tax deduction: the actual expense method and the standard mileage rate method.
How to qualify for business car tax deductions
If you can put a check next to these three qualifications, you can deduct the business use of your personal car.
1. You’re self-employed
You must be self-employed to deduct the business use of your car. Before the Tax Cuts and Jobs Act (TCJA), employees could also deduct some unreimbursed business expenses, including business mileage on their personal cars. Now, employees who use their cars for business travel rely on receiving mileage reimbursem*nt from their employers.
I’m going to pick on S corps in this article, but it’s nothing personal. S corp owners who classify as employees can’t take a car tax write-off as a sole proprietor can. Instead, write a reimbursem*nt check from your S corp to your individual bank account for the business use of your personal car. You can use either method when the car’s title is in your name.
2. You or your business leases or owns the car
You can’t deduct a car you don’t own or lease. Make sure the car’s title is in either your name or your business’s name.
Only put a car in your business’s name if you don’t plan to use it for personal reasons, especially if you’re an S corp owner. Driving a business car for personal purposes counts as a taxable fringe benefit, potentially negating the car tax deduction’s benefit.
Further, when the car is in your business’s name, you can only use the actual expense method to deduct car expenses.
3. Business driving is more than commuting
If the extent of your business driving is commuting between home and work, the IRS would argue that you don’t actually use your car for business. A regular commute between home and the office doesn’t qualify as an eligible business trip.
You can only deduct your car's business use for driving between workplaces, from your office to a client’s office, for example.
However, those who work from a home office can count driving to another workplace as business mileage. Don’t forget to take a home office deduction, too.
How to take a tax deduction for the business use of your car
You can choose between two methods for deducting the business use of your car. You’ll face restrictions if you switch methods, so choose wisely.
1. Determine the business use of your car
Assign a percentage for the personal and business use of your car, based on mileage. To the IRS, commuting goes in the personal mileage bucket.
The best way to track mileage during the year is by using a mileage tracking app, such as Freshbooks Mobile, or taking pictures of your odometer before and after a business trip and recording mileage in a spreadsheet.
For example, Becky Business-Owner drove her leased Honda Civic 40,000 miles last year. She put in 30,000 business miles and 10,000 personal miles. Therefore, her car is used 75% for business and 25% for personal purposes.
2. Determine the standard mileage deduction
The standard mileage deduction formula is:
Standard Mileage Deduction = (Business mileage ✕ IRS standard mileage rate) + Non-Commuting Parking + Tolls
The IRS standard mileage rate changes annually. In 2020, it’s $0.575.
Becky’s standard mileage deduction is $17,250 (30,000 business miles ✕ $0.575 IRS mileage rate). She incurred no parking or toll expenses.
3. Determine the actual expense method deduction
Next, tally the actual expenses of your vehicle for the year. Include these costs:
- Gas
- Oil
- Repairs
- Tires
- Insurance
- Registration fees
- Licenses
- Depreciation or lease payments
- Parking unrelated to commuting
- Tolls
A note on depreciation and lease payments: Deduct depreciation for cars you own, and deduct lease payments for leased vehicles. You can deduct depreciation for cars financed through loans.
Depreciation throws a wrench in what would otherwise be a simple calculation. To calculate your car’s depreciation, consult your tax software or tax professional. What makes depreciation for cars complicated is the overwhelming number of depreciation methods and stipulations.
For example, if the car is used 50% or more for business, you can take an oversized depreciation deduction with the Section 179 deduction or bonus depreciation. Otherwise, depreciate your car using straight-line depreciation in proportion with its business use. Annual depreciation limits for cars depend on your car’s gross vehicle weight rating (GVWR).
Let’s get back to Becky, who leases her car. She incurred these expenses during the year.
Becky’s actual expense method deduction comes out to $8,175.
4. Choose the method with the highest deduction
In Becky’s case, she’d go for the standard mileage rate deduction because the $17,250 standard mileage rate method exceeds the $8,175 actual expense method.
If the numbers come out close and you’re unsure which method to use, go for the standard mileage rate. When you start out using the actual expense method, you can’t switch to the mileage rate. Yet, those who own their cars and start with the standard mileage rate can move at any time to the actual expense method.
Lessees can’t change their method for the duration of the lease, so choose carefully.
5. Take the car tax deduction on Form 1040 Schedule C
Sole proprietors enter their car tax deduction on Schedule C. Follow the guide below for reporting your car’s business expenses according to the method you chose.
Report the car tax deduction on Form 1040 Schedule C. Image source: Author
FAQs
You can write off your leased car payment when you choose the actual expense method.
If you finance the car, you can’t write off your monthly loan payment. Instead, take a depreciation deduction for a portion of your car’s value, up to the annual limit. Tax software or a tax professional can help you estimate the depreciation limit for your car.
This sounds like a joke, but it’s not: Depending on your car’s weight, you might qualify for a 100% tax deduction for buying a car when it’s used solely for business.
Cars with a GVWR between 6,001 and 13,999 pounds qualify for a 100% bonus depreciation deduction. In other words, buying a Cadillac Escalade for $80,000 is 100% deductible in the year of purchase with bonus depreciation. Most large SUVs qualify for the 100% deduction.
Lighter cars don’t qualify for a 100% first-year deduction, but you may deduct a sizable portion of your new car purchase with a Section 179 deduction, with annual limits on car and truck deductions.
Talk to a tax advisor before banking on deducting 100% of your car purchase.
When you use the actual expense method, you can deduct repairs on line 9 on Schedule C. Don’t report car repair costs on line 21, “repairs and maintenance.”
There’s vroom to save with a car tax deduction
Deducting the business use of your car as a business owner doesn’t have to be complicated. Keep track of business trips taken in your personal car, and you can get a tax deduction.
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As a seasoned tax professional with extensive experience in business taxation, I can confidently navigate the intricate landscape of tax deductions, especially those related to the business use of personal cars. My expertise stems from years of assisting business owners in optimizing their tax strategies and ensuring compliance with the ever-evolving tax laws.
Now, let's delve into the concepts presented in the article:
1. Business Use of Personal Car Tax Deduction:
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Introduction: Business owners can claim a tax deduction for using their personal cars for business purposes. This deduction can significantly lower taxable income.
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Qualifications: To qualify for the deduction, business owners must be self-employed, own or lease the car in their name or the business's name, and engage in business driving beyond regular commuting.
2. Methods for Calculating Car Tax Deduction:
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Actual Expense Method: Involves tracking and deducting actual expenses incurred for the car, including gas, repairs, insurance, and more.
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Standard Mileage Rate Method: Involves multiplying business mileage by the IRS standard mileage rate, which varies annually.
3. Qualifications for Business Car Tax Deductions:
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Self-Employment: Only self-employed individuals can deduct business car expenses. Employees are no longer eligible post the Tax Cuts and Jobs Act (TCJA) unless they receive mileage reimbursem*nt.
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Ownership or Lease: The car must be owned or leased by the business owner, with the title in either their name or the business's name.
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Business Driving: Business driving should go beyond regular commuting, including trips between workplaces and visits to clients.
4. Methods for Deducting Business Car Expenses:
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Determining Business Use: Assigning a percentage of personal and business use based on mileage.
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Standard Mileage Deduction: Calculated using the formula (Business mileage × IRS standard mileage rate) + Non-Commuting Parking + Tolls.
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Actual Expense Method Deduction: Calculating actual expenses for the year, including gas, oil, repairs, insurance, and more.
5. Choosing the Best Deduction Method:
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Comparison: Business owners should compare the deductions obtained through both methods and choose the one with the higher deduction.
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Method Selection: Once a method is chosen, it's important to stick with it, as switching methods may have restrictions.
6. Reporting the Deduction:
- Form 1040 Schedule C: Sole proprietors report their car tax deduction on Form 1040 Schedule C, detailing business expenses according to the chosen method.
7. Additional Insights:
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Leased Car Payments: Leased car payments can be written off using the actual expense method.
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Financed Cars: Monthly loan payments for financed cars aren't deductible, but depreciation deductions are available within annual limits.
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Weight-Based Deductions: Depending on the car's weight, business owners may qualify for a 100% tax deduction for the purchase of a car used solely for business.
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Actual Expense Method and Repairs: Repairs can be deducted using the actual expense method on Schedule C.
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Caution on 100% Deduction: The eligibility for a 100% deduction depends on the car's weight, and it's advisable to consult with a tax advisor before relying on it.
In conclusion, optimizing the business use of personal cars for tax deductions involves a strategic understanding of eligibility criteria, calculation methods, and reporting procedures. Business owners should carefully evaluate their circ*mstances to choose the most advantageous deduction method for their situation.
